Two papers worth commenting on today – one of factor investing/ESG, the other on the imminent arrival of QE4.
The first research note is from the always excellent Nicolas Rabener at Factor Research.
The German investment analyst continues to mine the data on factors and styles, turning his attention this week to ESG investing and value. You can see his excellent note HERE – or at https://www.factorresearch.com/research-can-value-investors-do-good?mc_cid=87766571e3&mc_eid=d8376c4e49.
Using an ESG data set based around numbers from 2009 for Citizenship, Environmental, Employees, and Governance, Rabener then compare’s returns with those from value factor strategies.
The result? ESG factors underperformed value since 2009.
“Investors might be surprised that Value outperformed the market in this analysis, but that can be explained by a concentrated portfolio and the starting point in 2009. Value experienced a significant drawdown in the global financial crisis and we are essentially witnessing a rebound of the strategy. “
Rabener correctly pinpoints one key factor – the sector bias of each factor set. Financials are heavily promoted in value strategies (which were dirt cheap in 2009) whereas ESG screens tend to be overweight Technology, Health Care, and Consumer Staples stocks.
“Investors should expect residual ESG factors to structurally generate negative returns as companies focused on ESG aim to satisfy all stakeholders, not only shareholders. Scoring high on ESG consumes resources and the benefits for shareholders are not clear in all cases. Some types of investors like pension funds or retail investors are likely to accept slightly lower returns from ESG investing given that these are deeply integrated into their local communities and often experience good corporate citizenship directly, which creates an intrinsic interest in ESG. More mercenary investors like hedge funds might take the other side of the trade.”
I’ve chosen to highlight this last sentence – might betting against ESG factors be a more successful strategy for hedge funds? Oh, the rich irony – can imagine the readers of the Corbynista Guardian howl as they contemplate this horrible prospect. “Hedge funds short ESG friendly businesses.
Say Hello to QE4
Anyway, back in the real world, there’s yet another great paper out this week from Cross Border. Its summary cannot be bested and I’ve pasted it in below – couldn’t have said it better myself. Spot on.
“ Modern financial systems cannot operate without large Central Bank balance sheets. We consequently expect to see a return to quantitative easing (QE) sooner than many expect. Already, spooked by December’s credit sell-off, the US Fed has signalled greater future balance sheet flexibility. The key question is how will any QE4 be positioned? We suggest that a more directed programme is likely, and one that focuses directly on infrastructure spending, rather than asset prices for the wealthy 1%”.
And here’s the incendiary conclusion…
“…QT threatens a market crash, not least because it is now happening against a background of much larger-sized public and private debts that will need to be refinanced. After the 1930s crisis, capitalism was saved by State intervention through public spending, but 1937/38 saw a serious hiccup in the recovery when fiscal policy tightened and banks’ statutory reserve requirements were deliberately doubled, forcing a near-10% contraction in GDP. Now, following a parallel State intervention engineered after the 2007/8 Crisis through larger Central Bank balance sheets, we are seeing a ‘1937/38-like’ hiccup as the punch-bowl is again removed. US policy-makers now appear to realise they will have to quickly re-fill it. Chinese policy-makers, already wedded to PBoC balance sheet expansion, would probably agree, but in Europe policy action is likely to suffer inertia.”
As I said, I couldn’t agree more.
A new version of QE is coming, the first step of which will be a form of People’s QE, based around green infrastructure. Just because the lunatic Left champion a form of Green New Deal doesn’t make it completely bonkers idea. Their version – MMT to infinity – would end up in carnage but a different version might just work – read Richard Duncans excellent The New Depression for proof. And if nothing else, it might just stave off the very worst effects of global warming.
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